💵 Deglobalisation Is Wishful Thinking

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TSMC founder Morris Chang says globalisation is 'almost dead'. The Veteran says it's more of a Gordian Knot than policymakers are willing to admit...

In Greek mythology, the Gordian knot was a binding so complicated that it was thought to be impossible to undo. Legend has it that Alexander the Great solved the intractable problem by simply cutting the knot with his sword.

Alexander broke the links but did he really solve the problem??

Late on Tuesday evening, I found myself in an irritable mood, snappy and fractious. No particular reason. Perks of the job perhaps...

Anyway, I chanced upon a tweet with a clickbait headline that had been shared in the Macrodesiac chat 

“Tim Cook Says Apple is to move iPhone production to the US”

My mood darkened. I went off on a rant about how unlikely or unachievable this was, posted a list of Apple suppliers questioning how Apple could find US replacements for these companies, most of which are based in Asia.

I railed against the idea that Foxconn, which assembles many of Apple’s products under contract, could replicate the existing operations in China, Vietnam, and India.

Foxconn or rather its parent company, Taiwan’s Hon Hai Precision employs almost 1.3 million people.

Where would it find a headcount of that size, or even a fraction of that, in the US labour market, where there are 6 million unemployed and 10.75 million job vacancies?

What about the cost of employing workers in the USA who would bear the uplift?

I even wondered if they could find the labour force in Mexico, which brought visions of huge queues of Mexicans crossing the US border to work in assembly plants in the US before returning south of the border when their shift ended.

On (very brief) reflection that seemed unlikely, given the numbers involved and the already congested Mexican border.

However, it soon became clear that in fact, the Apple CEO had only said that the company would seek to source chips for its iPhones in the US.

Chips that Apple might design for itself and have fabricated by a third party - Who might that be? Another Taiwanese business... Taiwan Semiconductor (TSMC)

How is Apple going to secure chips made in the US by a Taiwanese manufacturer?

TSMC is building fabrication facilities in the US in Arizona. The company recently announced that it is to triple the investment in the desert state from an initial $12bn to a whopping $40bn. TSMC will also build a second factory next the one thats currently under construction: A huge campus located North of Phoenix.

Taiwan Semiconductor hopes to be operational in the first plant by December 2023 though looking at the image above that might be wishful thinking!

The aim is to have the second fab in production in 2026.  Apple will still rely on Taiwanese know-how and labour it's just that some of it will be much closer to home.

My misdirected mental exertions weren’t a waste of time though because they set me thinking about deglobalisation and what that might involve.

It's understandable that in the wake of Covid lockdowns and the disruption to the supply chain, businesses have looked closer to home for their components and raw materials.

However, the truth is that offshoring was so popular because it dramatically reduced the cost of production, even allowing for the transportation of components or finished goods from Asia to the markets of the US, Europe and further afield.

After decades of that process, the chances of finding alternative suppliers and manufacturers around the corner, in the same country or even the same continent, are slim to none.

The chart below from Our World in Data shows the percentage growth in global trade, which we can think of as a proxy for globalisation and latterly for offshoring, between 1950 and 2014. It's not quite a parabolic curve but it's not far off either...

Global trade in 2021 was valued at $28.5 trillion.  This may represent a near-term peak thanks to the war in Ukraine and an increase in geopolitical tension.

The Russian aggression against Ukraine exposed the soft underbelly of globalisation with the realisation that a reliance on imported energy, however cheap, is never a good idea.

Lessons that our parents and grandparents learnt in the 1970s have been reiterated to the current generation. The prospect of gas and energy shortages this winter remains real and helps to support the idea of a 70s analogue...

A second winter of discontent that’s fuelled by strikes, the cost of living crisis and the possibility of power cuts, all presided over by a government at odds with itself and an ineffective and policy-less opposition party.

The folly of Western energy policies over the last three decades has become clear. Governments and businesses now want security of supply, not just for energy but for food and raw materials as well.

But unfortunately, that isn't going to be easily achieved. Yes, we can do more to grow our own food and generate our own power but none of that will happen overnight. The push to renewables means that we will also (always?) have some marginal demand for or oversupply of power.

For example, on Wednesday afternoon with the wind blowing around the UK, we had excess power which we could sell to the continent, But on another day the reverse may be the case, and we'll look to buy power from European neighbours (electricity doesn't have to wait in long queues at EU borders).

We could perhaps become energy self-sufficient if we had some means of storing excess power. Think of all the energy soaked up by solar panels during those endless hot summer days. But as things stand we don't have that facility.

What about batteries you say?

Tables like this show that becoming reliant on Lithium battery technology would potentially put us back to square one. 👇

Meanwhile, of course, the government insists that we must all move to EVs and give up our internal combustion engines. The rush to green energy has nearly wrecked the German economy, might we be repeating the same mistake before the dust has even settled in Berlin?

Via The FT 👇

Lithium is just one example of a relatively scarce commodity that is in demand now and which will remain so for many years to come. Crucially it cannot be sourced locally.

In an ideal world, there'll be a breakthrough in alternative battery metals, and we can all have a good laugh about the great Lithium shortage that never was...

But this isn't an ideal world. It's a highly globalised, deeply-flawed world (that somehow keeps on turning).

Deglobalising the economy to any great extent is wishful thinking in my humble opinion.

The road to any kind of self-sufficiency is full of potholes and holds the potential for some unintended and very unpleasant consequences.